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Part 1: Dr. Francia

Totally isolated inside South America for centuries,
Paraguay was in its early history the stage for an experiment in autarchic
development directed by the Order of the Jesuits (the subject of the movie
"The Mission"). However, the Jesuits were expelled from Spain and all
of its colonies by a directive of King Carlos the Third in 1767.

Following its independence in 1811, Paraguay was isolated
economically by the government of Dr. Francia (1814-1840), who was elected as
"Supreme Dictator" by the people's congresses of 1814 and 1816.
("Francia" means literally "France" in Spanish. The name
apparently reflects the Brazilian and French descent of the dictator's father.)

With the support of small peasants and town artisans, Dr.
Francia expelled from the country the owners of private large landed
properties. These were the usual followers of free trade ideology, whose
economic interests, as we'll see in greater detail later, consisted in
exporting plantation products and importing luxuries from the cities.
Paraguayan land owners were poorer than their counterparts near coastal
regions, particularly in Buenos Aires and Brazil, since all the authorities
along the rivers leading to the ocean took advantage of their location to
collect the heaviest possible load of transportation taxes. The last conspiracy
of the Paraguayan land owners to regain their position was put down in 1821 (by
means of dramatic and exemplary executions of all those involved), and with it
the "free trade" mechanism for organizing the economy.

In its place, an internal market was created by small
peasants and artisans, and to this day 19th-century Paraguay remains the only
country in Latin America and probably the whole of today's Third World to have
developed one on its own. All the
land was declared the property of the state, and everybody had an obligation to
work. Peasants worked the farms and pastures, and artisans pursued their
crafts. Formally, the state had a budget, but the exchange of goods was largely
product-for-product barter (though old Spanish gold and silver coins were
accepted as well), with the producers full owners of the fruits of their labor.

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With this system in place, the country achieved self-sufficiency
and even an over-production of food supply in the 1830s. At the same time,
crime was suppressed by the most severe punishments: the hands of thieves were
literally cut off in the act. The absence of both unemployment and crime made
Paraguay probably the only country in the entire world at the time with such a
complete set of positive characteristics.

To prevent any temptations that might disturb the country's
peace, Dr. Francia throughout his reign detained all newspapers arriving from
abroad in his office. He also prevented any information from leaking out of the
country, though he did allow occasional travelers to enter and leave under his
personal license. Unfortunately, the fear that such travelers might twist their
information about the country abroad proved well founded, as is shown in books
written in Europe by the Swiss writers Rengger and Longchamp and the Scottish
Robertson brothers.

The exercise of such ideological control by the Francia
regime was made possible in large part due to a virtual total paralysis of
trade. All exports and imports were carried out under the authority of Dr.
Francia's personal licenses through a border post with Brazil that was not
opened during the entire period of the Francia government. The imports were
very few, and had to do with the State's strategic needs, most importantly,
defense. This dictatorship, however, primeval as it may seem today, had the
total support of the Paraguayan population, including the country's still
significant aboriginal population, the Guarani Indians, the previous generation
of which had been educated by the Jesuits.

Besides his role as a harsh and unorthodox statesman, Dr.
Francia also proved to be an unusually honest leader. He left to the state's
treasury about 30,000 pesos of his salary, which had been uncollected at the
time of his death in 1840. According to scarce testimony, his funeral was
attended by about 40,000 weeping devotees. These were working people who had
benefited from his regime and improved their situation. His ashes, however,
were "mysteriously" extracted from the cathedral where they had been
deposited in 1847, and dumped into the river. An explanation of this
"mystery," however, may be deduced from what follows next.

Part 2: The Lopez Family and the Triple Alliance War

Dr. Francia left the State's governing power to the
military. In 1844 Carlos Antonio Lopez, until then an unknown lawyer, was
appointed as the new head of state, a post for which he was ratified several
times by the National Assembly, which was constituted without parties. A
few changes, however, had to be introduced. The only symbol identifying the
country had been the flag. Now, a state emblem was adopted, as well as a
constitution and a national currency. Slavery was abolished. It had formally
existed under Dr. Francia's government, but was of scant economic importance
and never marked by the characteristics of brutality customary in the
neighboring Empire of Brazil and the Caribbean.

All of the changes introduced were based on an assumed need
to make Paraguay a part of the world--an entity Dr. Francia didn't give a damn
about, as long as it didn't touch his country. By the late 1830s, an
over-production of food apparently was left to rot in the fields, instead of
being exported. The surplus had to be directed somewhere, but trade, though an
obvious option, turned out, as we'll see, to be a fatal choice. It was put on
one track only: the country began to export, but the imports remained
strictly controlled. Thus, the accumulation went on.

The country then began hiring foreign technicians to
develop different branches of the economy. After that, it sent its own youth to
study abroad, including, among the first, Francisco Solano Lopez, the
President's eldest son. All of these efforts led to the industrialization of
Paraguay in the 1850s. Latin America's first foundry was established in the
country in 1854, as were national railways and ship-building docks. (Railways
and ship-building docks also existed in Cuba, but these were properties of the
Spanish; the island itself was still a colony.) Paraguay had previously
purchased ships manufactured abroad, but, with its own ship-building docks, it
could now put afloat both wooden ships and, later, ships built of iron.

The most important point today about Paraguay's
industrialization, however, is that it was accomplished entirely with the
country's own money: it had no inflation, no debt, and no deficit, but,
instead, a steady surplus and a currency in a continuous state of appreciation.
It had achieved its economic growth without ever taking a loan from abroad,
while surrounding Latin American countries were suffering from what was already
considered at the time a "normal" combination of debt and inflation,
on the one hand, and, on the other, increased crime rates due to a chronically
ailing economy. (An exchange crisis provoked by external debt caused the first
Emperor of Brazil to resign from the throne in 1830, following which regional
wars threatened to tear the country apart.) Paraguay's exports consisted mostly
of natural resources and agricultural products: notably, wood, "mate"
[maatea], tea, and tobacco. It is noteworthy, however, that all of these items-- agricultural
products for consumption, and wood for furniture and construction--were used to
satisfy national needs first.

Paraguay's exports, however, at first a need, proved
eventually to be a trap. The country's neighbors, most notably Brazil and
Argentina (the latter still in the process of becoming a country), were already
satellites of Great Britain, the new metropolis. Motivated by a "free-market"
ideology and the interests of the elites supporting it, Paraguay's neighbors
needed free access to its natural resources for export (to Great Britain first)
and to its internal rivers to transport them.